Emerging Markets

The Brexit vote is a game-changer for EM. While the direct impact on EM is limited, the damage to market sentiment is undeniable. In addition, to make matters worse, there will be a protracted period of uncertainty as the UK and the EU negotiate the divorce proceedings.

We do not think individual country stories will matter much in this new investment climate, where risk assets are likely to remain under broad-based selling pressures. We believe that Asia will outperform, while Latam and EMEA are likely to underperform.

Ethiopia seems to be attracting the attention of economists interested in Africa, and for good reason. Except for Rwanda, Ethiopia is the only African country whose economic growth has been consistently high for more than a decade without relying on a natural resource boom.

Between 2004 and 2014, per capita growth in Ethiopia was 8% per year. This was the highest on the continent during this period, and is impressive by any standard.

The South African Reserve Bank’s latest Quarterly Bulletin confirms that foreign corporations are milking South Africa. They are drawing away profits far faster than they are reinvesting or than local firms bring home offsetting profits from abroad. Can anything be done to stop the hemorrhaging?

Parliamentary budget offices are meant to be watchmen that help parliamentarians by providing them with solid budget analysis. They are supposed to provide honest budget numbers based on nonpartisan evaluations. To do this they must maintain a pristine reputation free from corruption, political dealings or criminal activity.

South Africa has narrowly survived a downgrade of the rating of its government bonds. The reprieve, however, is temporary because government has been warned by the Big Three rating agencies – Fitch, Moody’s and Standard & Poor’s – to pull up its socks.

Most of the headlines in recent weeks have focused on Brazil’s troubling political crisis. However, the country is also in the midst of a deep economic recession. The economy has been shrinking since the second quarter of 2014. It contracted by 3.8 percent in 2015 and is expected to shrink by a similar amount this year.

EM ended last week under pressure. With two potentially disruptive events (FOMC meeting and Brexit vote) still in play, we think that EM softness should carry over into this week.

Markets remain jittery about the June 23 Brexit vote, as a vote to leave would be very negative for risk assets such as EM. No action is expected at the FOMC meeting Wednesday. However, we think July remains very much in play and the FOMC statement should help keep that notion alive.

EM ended the week on a firm note after the US jobs shocker. While we view the weak reading as a fluke, shifting market perceptions of Fed tightening risk should keep EM bid near-term. However, we think the July FOMC meeting is still very much alive. That and the upcoming Brexit vote are potential pitfalls for EM in the coming weeks.